Auditor of Public
Accounts Update
Joseph Stepp, CPA CIA CGAP CGFM CFE
Audit Director
Higher Education Programs
April 2011
Higher Education Programs Specialty Team
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Discussion Topics
• APA Audit Initiatives
• Issues Identified During Audits
• General Assembly Issues
• Auditing Issues
• Fraud at Universities
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APA AUDIT INITIATIVES
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APA Audit Initiatives
• Continue to Improve Banner Audit Approach
• Revise Student Financial Aid Audit Approach
• Revise NCAA Agreed-Upon Procedures
Program
• Diversify Project Manager and Staff
Assignments
• Accelerate Completion of Audits
• Federal In-Cycle Reviews
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APA Audit Initiatives
• Continue to Improve Banner Audit
Approach
• May need to request more or different
tables and information
• More reliance on access rules
• Look more closely at Banner fixed assets
and human resource modules
• Issue efficiency findings
in audit reports
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APA Audit Initiatives
• Revise Student Financial Aid Audit
Approach
• Working with VCU to review Banner
controls
• Review which controls may be
embedded in the system as opposed to
testing individual students
• May not be ready for FY11
Student Financial Aid audits
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APA Audit Initiatives
• Revise NCAA Agreed-Upon Procedures
Program
• Make the program more user friendly
• Compare requirements to what the
universities actually do
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APA Audit Initiatives
• Diversify Project Manager and Staff
Assignments
• Continue to assign Project Managers with
different specialties but retain continuity of
assignments where possible
• Assign staff from different specialties,
including Court Auditors, to Student
Financial Aid and NCAA assignments
• Continue to provide support from
Higher Education Specialty Team
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APA Audit Initiatives
• Accelerate Completion of Audits
• Current Fall Audits completed by December 31,
2011
• UVa, VT, and VCU
• Reaccreditation Audits –
• FY10 GMU – FY11 ODU and RU
• Complete FY12 audits by December 31, 2012
• UVa, VT, and VCU
• CWM, GMU, JMU, and ODU
• Accelerate Audits in Future Years
• CNU, LU, NSU, RU, UMW,
VMI, and VSU
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APA Audit Initiatives
• Federal In-Cycle Reviews for FY11
• Research and Development
• UVa, GMU, NSU
• Student Financial Aid
• CWM, JMU, LU, ODU, and VT
• Blue Ridge CC, Dabney S. Lancaster CC,
• Eastern Shore CC, J. Sargeant Reynolds CC,
• New River CC, Southside Virginia CC,
• Southwest Virginia CC, Thomas Nelson CC,
• and Virginia Western CC
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ISSUES IDENTIFIED
DURING AUDITS
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Issues Identified During Audits
•Capital Asset Issues
•Banner Efficiencies
•Purchase Card Transactions
•1,500 hour rule and Overtime
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Capital Asset Issues
• Completing Capital Asset Inventories
• Reconciling Capital Asset Inventories
and Promptly Posting Corrections
• Tracking and Resolving Lost or Stolen
Assets
• Accounting for Intangible Assets
• Reporting Library Books
• Art and Historical Treasures
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Tracking and Resolving
Lost or Stolen Assets
• Discover Lost or Stolen Assets either through
discovery or inventory
• Promptly post deletion to capital asset records
• Investigate reasons for loss and refer to law
enforcement when necessary
• Consider accumulating quantities of Lost or
Stolen Assets
• Consider follow-up with departments with
significant quantities of
Lost or Stolen Assets
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Art and Historical Treasures
• Paintings and Sculptures
• Purchased or Donated Items of Significance
• Student Art
• Rare Books
• Reference Materials
• Historical Significance
• Manuscripts and Memorabilia
• University Records
• Student Produced Research
• Historical Items and Papers
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Art and Historical Treasures
• Three main issues
• Stewardship
• Accounting
• Financial Reporting
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Art and Historical Treasures
• Stewardship
• Physical Control
• Prevention of loss or theft
• Environmental Control
• Limit deterioration or catastrophic loss
• Risk Management
• Complete records for insurance coverage
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Art and Historical Treasures
• Accounting
• Inventory
• Complete listing regardless of location
• Valuation
• Estimates of current value for insurance
coverage
• Review
• Periodically confirming presence
and valuation
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Art and Historical Treasures
• Financial Reporting
• Capitalization Policy
• Follow general capitalization rules or use
exceptions
• Historical Cost Valuation
• Purchase price, if available, or value at date
of donation
• Footnote Disclosures
• Disclose any reasons as to why
collections are not capitalized
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Banner Efficiencies
• Interfacing Banner Finance with eVA
Including Receiving Functions
• Automating Deferred Revenue
Calculations
• Automating Holds on Student Accounts
• Implementing Banner HR Efficiencies
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Purchase Card Transactions
• Review procedures based on changes in
purchase card vendor
• Improve procedures for supervisory review
• Revise training for cardholders and
supervisors
• Delete purchasing system access timely for
terminated employees
• Improve SPCC Administration to include audit
trail, purchase limits and
potential split purchases
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Part-time Employees
and Overtime Hours
• Limiting Hours of Part-Time Wage Employees
• State Policy Limits Part-Time Wage Employees
to 1,500 Hours per Year
• Why is this important?
• How to monitor this?
• Limiting Overtime Hours
• Why should colleges monitor and limit
overtime hours?
• At what point does increased
work hours lower efficiency?
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GENERAL ASSEMBLY
ISSUES
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General Assembly Issues
• Virginia Higher Education Opportunity Act
of 2011 - TJ21
• Establish State Inspector General
• Higher Educational Institutions Bond Act
of 2011
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Virginia Higher Education
Opportunity Act
• Recommends Higher Education funding policy :
• Reaffirms state funding of basic operations at 67% for
in-state students and commitment to fund faculty
salaries at 60th percentile of peer universities.
• A per student amount of General funds to the Virginia
public or private university where the student enrolls.
• Institutional funding of financial-aid to low and middle
income families.
• Targeted economic and innovative incentives based on
criteria set by the Higher Education Advisory
Committee with ten possible goals.
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Virginia Higher Education
Opportunity Act
• Universities are required to develop a six-year plan every
other year that includes:
• Financial plans with possible tuition and general fund levels
aligned with projected enrollment levels.
• How the university will meet the financial-aid needs of students.
• Degree conferral targets.
• Optimal year-round facility usage plans.
• Plans to share instructional resources with other universities.
• Programs to meet the economic and innovative targets and
incentives.
• Identification of any new programs or targets.
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Virginia Higher Education
Opportunity Act
• Creates a Higher Education Advisory Committee
that will:
• Review the higher education funding model.
• Review the criteria to qualify students for financial aid
programs.
• Develop objective performance criteria (replacing
criteria currently in the Appropriation Act) for
universities to qualify for financial incentives.
• Develop economic opportunity metrics.
• Recommend additional authority and goals and
objectives that should be attained under the
Higher Education Restructuring Act.
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Virginia Higher Education
Opportunity Act
• SCHEV will determine each year if the
institutions have met performance criteria set up
by the Committee beginning for FY14. FY11
certification carries forward through FY13.
• Universities are to limit tuition increases to base
operations funding and unavoidable increases.
Universities use must any excess to fund
financial aid and forgo any increase of
appropriations above FY12 levels.
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Virginia Higher Education
Opportunity Act
• Secretaries of Education and Finance to create a
STEM public-private partnership advisory
committee to advance STEM education
throughout the K-16 system.
• VCCS is to create a one-year certificate where all
credits are transferrable to any Virginia Statesupported University.
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Office of the
State Inspector General
• Office of the State Inspector General replaces
Department of the State Internal Auditor
• Appointed by Governor for four-year term
• CPA or CIA with five years experience
• Duties
•
•
•
•
•
•
Receive complaints of fraud, waste, and abuse
Investigate state agencies and nonstate agencies
Coordinate current internal audit programs
Assess accounting, financial and administrative controls
Conduct performance reviews
Administer Fraud Hotline and
Whistle Blower Reward Fund
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Office of the
State Inspector General
• Refers complaints of fraud at universities to their
internal audit departments
• All state agencies and employees shall promptly
report any allegations of criminal acts or of
fraud, waste, abuse, corruption, or mistreatment
to the State Inspector General
• State Inspector General may investigate any state
agency at any time, without prior announcement
• Can issue summonses and subpoenas
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Office of the
State Inspector General
• Reports all problems, abuses, and deficiencies to
seven executive and legislative officials
• Directly supervises internal audit at
VDOT, DBHDS, DJJ, and DOC
• Governor may transfer appropriations
• Governor shall complete a plan for the
coordination and oversight of internal audit
programs to the State Inspector General by
December 31, 2011
• Becomes effective July 1, 2012
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Higher Educational
Institutions Bond Act of 2011
• Bond issuance of $64.6 million
• VCU West Grace Street Housing North $33.8 million
• VSU Quad Phase II - $30.8 million
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VCU Grace Street Housing
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Quad Hall Phase I
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AUDITING ISSUES
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SAS 112
vs.
material weakness - more than a
remote likelihood that a material
misstatement of the financial
statements will not be prevented
or detected.
significant deficiency - more
than a remote likelihood that a
misstatement of the entity's
financial statements that is more
than inconsequential will not be
prevented or detected.
SAS 115
material weakness - a
reasonable possibility that a
material misstatement of the
entity’s financial statements will
not be prevented, or detected
and corrected on a timely basis.
significant deficiency - less
severe than a material
weakness, yet important enough
to merit attention by those
charged with governance.
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SAS 112 vs. SAS 115
• Clarifies the requirements for
consideration of compensating controls
• Changes the “prudent officials” test
• Deletes list of indicators of significant
deficiencies
• Reduces the list of deficiencies in internal
control that are strong indicators of
material weaknesses
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SAS 70
Consider several different areas where the
University may have contracts
• Loan servicing
• Credit card transactions
• Tuition payment plans
• Loan entrance/exit interviews
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FRAUDS AT COLLEGES AND
UNIVERSITIES
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Auditor of Public Accounts
§ 30-138. State agencies, courts, and local constitutional officers
to report certain fraudulent transactions; penalty.
A. Upon the discovery of circumstances suggesting a reasonable
possibility that a fraudulent transaction has occurred
involving funds or property under the control of any state
department, court, officer, board, commission, institution or
other agency of the Commonwealth, including local
constitutional officers and appointed officials exercising the
powers of elected constitutional officers, as to which one or
more officers or employees of state or local government may
be party thereto, the state agency head, court clerk or local
official in charge of such entity shall promptly report such
information to the Auditor of Public Accounts ("Auditor") and
the Superintendent of State Police ("Superintendent").
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Auditor of Public Accounts
•What must be reported
• Reasonable possibility
• Fraudulent transaction
• Involving state funds
• Involving a state employee
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What is fraud?
• Any deception practiced to cause one to
surrender something of value or a legal
right.
• Obtains property by false pretenses
• Embezzles or commits larceny
• Converts the property of another
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Definition of Fraud Triangle
Theft
Conversion
Concealment
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What is Not Fraud
• Theft by non-employees
• No concealment
• Errors in financial documents not resulting
in theft of assets
• No theft
• Using business assets for business
purposes
• No conversion
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What May Be Fraud
• Procurement irregularities
• Kickbacks
• Bribes
• Gifts
• Financial statement irregularities
• Overstatement of revenues
• Understatement of liabilities
• Conflicts of Interest
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Why does fraud occur?
Classic Fraud Triangle
Motive
Opportunity
Rationalization
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The Perfect Storm is Brewing
Internal Controls
Layoffs
Decreased
home values
Credit crisis
Internal and
External Pressures
Downsizing
Fewer controls
Decreasing budgets
Increased
pressure and
decreased
controls
Opportunity to
Commit Fraud
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Why does fraud occur?
• Opportunity
• Poorly designed internal controls
• Failure of internal controls
• Management override
• Collusion
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How Management Can
Respond
• “Tone at the Top” Ethical Culture
• Review Internal Controls
• ARMICS
• Internal and external audit
• Employee Morale
• Fraud Hot Lines
• Codes of Conduct
• Employee Counseling
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Auditor’s Responsibility
• Discussion regarding risk of material
misstatement due to fraud
• Obtain information needed to identify risk
of material misstatement due to fraud
• Identify risks that may result in material
misstatement
• Assess the identified risks considering the
evaluation of controls
• Respond to the assessment
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Current Fraud Areas
• Cash Collections
• Procurement Cards
• Local Bank Accounts
• Vendor Gifts
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Cash Collections
• Skimming vs. Larceny
• Not recording transactions
• Voiding valid transactions
• Writing off accounts receivable
• Lack of reconciliations
• Concealment in the records
• Unusual adjustments or
reconciling items
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Cash Collections
• Diverting cash received before it
goes to the cash register or receipt
book
• Creating false refunds or voids to
hide taking cash out of the register
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Cash Collections
• Are lesser amounts collected when
certain employees are on duty?
• Should two employees observe
collections?
• Are there more voids when certain
employees are on duty?
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Local Bank Accounts
• Creating bank accounts for small
activities such as selling room
supplies
• Not properly monitoring student
activity or club bank accounts
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Controls Over Cash Receipts
• Ensure timely deposits
• Maintain complete audit trail
• Improve oversight of off-site locations
• Separation of duties
• Good bank reconciliations
• Cash counts, especially for change funds
and petty cash
• Proper approvals for refunds and
adjustments
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Improper Disbursements
• Small dollar disbursements
• Small purchase charge card
• Check tampering and manual checks
• Returning merchandise for cash
• Reimbursing personal expenses
• Checks made out to employees
• False invoices or other documents
• False refunds or student aid
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Procurement Cards
• Hiding Procurement Card
Transactions
• Poor Supervisory Review
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Hiding Procurement Card
Transactions
• Using downloaded transactions to
create facsimile card statements
• Creating store receipts that rename
or leave out certain purchased
items
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Hiding Procurement Card
Transactions
• Supervisors should only review
original card statements
• Supervisors should be alert to
receipts that don’t look right or
don’t add up
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Poor Supervisory Review
• Not reviewing statements or
receipts in detail
• Not questioning purchases from
inappropriate vendors
• Not questioning recurring large
purchases
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Poor Supervisory Review
• Cardholders notice when supervisors
do not perform a thorough review
• Problems when using residential
vendors and not commercial vendors
or wholesalers
• Should recurring purchases be made in
bulk or through procurement
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Controls Over
Improper Disbursements
• Separation of duties
• SPCC reviews and reconciliations
• Internal reviews for split purchases or over
limit purchases
• Use of Banner Workflows
• Proper receipting documents
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Vendor Gifts
• Employees receiving gift cards or
other gifts from vendors or
potential vendors
• Inappropriate to accept these even
if used for the university or
department activities
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Solutions
• Better training for purchase
cardholders and supervisors
• Better procedures for cash
collections including reconciliations
• Let employees know of university
policies relating to creating bank
accounts and accepting gifts
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Solutions
• Properly designed and documented
procedures (preventative)
• Properly executed procedures
(preventative)
• Proper post-audit procedures
(detective)
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Questions
Joseph Stepp, Audit Director
[email protected]